Motley Fool: March 23, 2013

A: You become “vested” when you become eligible to take ownership of something or exercise an option. Imagine that you work at Typewriter Depot (ticker: QWERTY) and you’ve been awarded stock options on 100 shares of company stock. Let’s say that over the next four years, 25 percent of the options vest each April 1. So on April 1, 2013, you’ll be able to exercise the option and buy 25 shares at the specified price. A year later, another 25 shares will “vest.” On April 1, 2016, you’ll be “fully vested” and can buy all 100 shares (or any shares you haven’t bought yet) — if you want to.

Companies structure rewards this way in order to motivate employees to stick around. Vesting schedules can vary, stretching over few or many years.

Learn more at nceo.org, mystockoptions.com and fairmark.com.

Q: I’m saving to buy my first home within three years. How should I invest my money to maximize my return on it? — B.D., Brooklyn, N.Y.

A: The stock market is often the best place for long-term investment appreciation, but for money you’ll need within a few years, it should be off-limits. In the short run, the stock market can go up — or down. In the long run, it has averaged close to 10 percent per year, but even that’s an average, not a guarantee.

Don’t risk money you’ll need within five years (or even seven or 10, if you’re very risk-averse) in stocks. Short-term funds should be kept in a safer place, such as CDs or money market funds, to protect your principal. Learn more about short-term savings at fool.com/savings and bankrate.com.

Fool’s School

Retirement Wreckers

Protect your retirement by avoiding these blunders:

(1) Cashing in your 401(k) when you switch jobs. Nearly half of workers do so, and that can leave them with far less to live on later. It’s better to transfer that money to an IRA, where it can continue growing in a tax-advantaged environment.

(2) Not saving enough. Aim for 10 to 15 percent of your salary (or more!), or you may not be able to retire later.

(3) Having no clue about how much to accumulate. Online tools at choosetosave.org/calculators and ssa.gov/retire2 can help you plan.

(4) Spending your retirement savings too fast. A rule of thumb is to withdraw about 4 percent of your savings each year, in order to be very unlikely to outlive your money.

(6) Letting Uncle Sam eat your retirement. Make smart decisions about what you hold in your tax-advantaged accounts, such as IRAs. Remember, too, that most folks will pay capital gains on stocks at a rate of 15 percent, while corporate bond interest is taxed as ordinary income (which can approach a 40 percent rate in 2013).

(7) Paying too much for advice. That can enhance your broker’s retirement more than your own. Make sure the advice you’re getting is paying for itself and more. Beware of advisers compensated by sales commissions, too — they might not have your best interests at heart.

(8) Retiring prematurely. If you’re in your 60s, you may have two or three decades ahead of you. Will your nest egg last that long? Before you retire, explore part-time or project work that you might want to take on in retirement.

Learn more at fool.com/retirement/index.aspx and money.cnn.com/retirement. And take advantage of a free trial of our “Rule Your Retirement” newsletter at ruleyourretirement.com. It offers solid, concise advice, along with stock and fund recommendations.

Foolish Trivia

Name That Company

I was envisioned and coded in 1995 as a marketplace accessible to everyone on Earth. My first sale was a broken laser pointer, and now my sellers offer everything from Pez dispensers to minivans. Born as AuctionWeb, I have a more familiar name now. I boast more than 112 million active users around the globe, and more than $67 billion worth of goods were sold through me in 2012 (excluding vehicles). My PayPal division sports some 122 million active accounts and processed $145 billion of transactions in 2012. I’ve also bought Shopping.com, StubHub and Bill Me Later. Who am I?

Last Week’s Trivia Answer

Founded in 1949 by a New Jersey accountant, I now rake in more than $10 billion annually and employ about 57,000 people worldwide. I process close to 48 million W-2 forms annually and provide payroll services for one of every six U.S. workers (some 24 million folks) and 10 million elsewhere. I have more than 600,000 clients, including 26,000 vehicle dealerships served by my automotive division. More than 80 percent of Fortune 500 companies use at least one of my many services. I’m one of only four U.S. companies to be AAA-rated by both Standard & Poor’s and Moody’s. Who am I? (Answer: ADP)

My Dumbest Investment

Grand Ideas

This isn’t necessarily my dumbest investment, but it’s one I have questioned. I have nine grandchildren, and I bought a $50,000 variable-life insurance policy for each of them, paying an annual premium of several hundred dollars for each. My oldest grandchild has suggested that I should have invested the money in stocks instead. Quitting the insurance policies would mean paying heavy penalties and would leave the children unprotected. So I feel safe with the investment. — F.B., Endwell, N.Y.

The Fool responds: There’s a strong case to be made to invest long-term money for grandchildren in stocks. Even a mere $1,000 investment can grow to $45,000 over 40 years, if it averages 10 percent annually.

Life insurance is critical for those on whom others depend financially. It’s less critical for children or those without dependents. Their deaths would be sad, even tragic, but wouldn’t lead to financial hardship for their loved ones. It’s best not to think of life insurance as an investment, because there are more effective ways to invest, and without so many restrictions and penalties, too.

******

The Motley Fool Take

Microsoft: Unloved and Undervalued?

Shares of Microsoft (Nasdaq: MSFT) grew by an annual average of 14.3 percent over the past 20 years, but only 4.5 percent over the past decade. Despite the reasons for the slowdown, the stock has some appeal at recent levels. It offers a 3.3 percent dividend yield, as well.

What, exactly, has been going wrong with Microsoft? Well, sales of its Windows 8 operating system have been disappointing. Its last reported quarter offered better-than-expected sales for Microsoft’s Surface tablet, but that device faces tough competition from iPads, Nexus 7s and others.

Bulls point to the company’s prodigious cash generation, but much of its income is tied to Windows and Office, which may suffer as PC sales have been shrinking. Even the Internet Explorer browser has been losing market share.

The company needs to develop big new profitable business lines, and it has several irons in the fire, such as a partnership with Nokia to develop inexpensive smartphones that could appeal to billions in developing markets. It’s developing original entertainment to stream on its home consoles, opening retail stores, and addressing the business realm with servers and other tools.

With a forward price-to-earnings (P/E) ratio of about 9 and tens of billions in cash in its coffers, the stock seems undervalued — as long as you have confidence in Microsoft’s future. (The Motley Fool owns shares of Microsoft.)

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